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IRS updates offer deductible medical expenses
Most veterinarians are used to client jokes about deducting the family pet on the personal tax return.
Most veterinarians are used to client jokes about deducting the familypet on the personal tax return.
Surprisingly, sometimes veterinary medical services can be deducted asan itemizable medical expense on Schedule A.
Late last year, the IRS released the updated 2000 version of publication502, Medical and Dental Expenses, which lists the various procedures andexpenses that now qualify as deductible.
Since many of the expenses described in publication 502 would not normallybe covered by a health insurance plan, keeping abreast of these changesmay provide additional deductions that would have been otherwise foregone.
Guide dogs or other animals to be used by a visually-impaired or hearing-impairedperson are listed. The law provides that a taxpayer may include in medicalexpenses the cost of such an animal. Additionally, a dog or other animaltrained to assist persons with other physical disabilities may also be deducted.Specifically, amounts paid for the care of these specialty-trained animalsare also medical expenses.
This allowance means that veterinary fees charged for the medical careof assistance animals can be deducted as a medical expense by the taxpayerclaiming the dog or animal as a deduction.
So, whose medical expenses can you include on your return?
You can include medical expenses that are paid for yourself and certainother individuals. Medical expenses paid for your spouse can be deductedif you were married either at the time your spouse received the medicalservices or at the time you paid the medical expenses.
If, however, you live in a non-community property state and file a separatereturn from your spouse, you and your spouse can only include medical expensesthat each of you actually paid. Medical expenses paid out of a joint checkingaccount in which you and a spouse have an interest are considered to havebeen paid equally by each of you.
If you file separate returns in a community property state, medical expensespaid out of community funds are divided equally. If medical expenses arepaid out of separate funds of one spouse, only the spouse who paid the medicalexpenses can include them.
Medical expenses can be deducted when paid for a dependent. The personmust have been a dependent either at the time medical services were providedor at the time you paid the expenses. You can include the medical expenseof a dependent even if you cannot claim that person as an exemption on yourreturn. Other rules apply for children of divorced or separated parents,support claimed under a multiple support agreement, and certain deceasedindividuals such as a spouse or dependent.
The various rules are too lengthy to cover in the scope of this article,but can be reviewed in publication 502 or with your accountant.
How much expense?
Unfortunately, not all of the medical expense paid during the tax yearis itemizible as a deduction.
The rules state that you can only deduct the amount of your medical anddental expense that is more than 7.5 percent of your adjusted gross income(AGI). For example, say your adjusted gross income is $100,000; then, 7.5percent of AGI would be $7,500. If you paid medical expenses of $10,000,only $2,500 would be allowed as an itemized deduction, the amount in excessof the $7,500 base.
When are expenses included as a deduction?
In general, time of payment is operative. The fact of when an expensewas incurred may not have bearing, although there are situations where thecourts have found that an expense might be deducted in a year other thanwhen it was paid. But, for the most part, the deduction is taken when paymentoccurs.
For this reason, plan ahead on when medical bills will be paid. Especially,if you can foresee many expenses bridging over two years, you might wishto defer payments on some bills until the second year so that the consolidationof expenses can gain the biggest deduction by maximizing the amount in excessof the 7.5 percent of AGI base.
When paying medical expenses by check, the day you mail or deliver thecheck is generally considered the date of payment. If you pay by telephoneor online, the date reported on the statement of the financial institutionshowing when the payment was made is considered the date of payment.
You can pay medical expenses on a credit card. The year in which thecharge is made is the year the expense was paid. It does not matter whenthe credit card bill is paid itself.
For that reason, any of your clients with a guide or assistance animalmay be able to accelerate a deduction by veterinary bill payment with acredit card if they do not have the funds readily available for check orcash payment at the end of the year.
What are examples of other expenses beyond assistance animals that mightbe allowed as deductions? Surprisingly, there are a number of very expensiveitems that can be included. For example, significant home improvements thatare made on a doctor's advice to accommodate a medical condition may beallowed to a certain extent.
Costs for home improvements that are directly related to medical careare deductible to the extent they exceed the increase in the fair marketvalue of the home resulting from the improvements.
For example, you install an elevator in your home because of a dependent'sdisability. Installation cost is $8,000. Say the value of your home increases$3,000 because of the elevator now permanently installed in it. In thissituation, $5,000 of cost in excess of the increase in fair market valuecould be a medical deduction.
Other examples of deductible expenses
Alcoholism: Payment for inpatient treatment at a therapeutic center,meals and lodging provided by the center during treatment for alcoholismcan be deducted.)
Transportation costs paid to attend meetings of Alcoholics Anonymousin your community pursuant to medical advice, can be deducted.
Birth control pills
Vehicle: The cost of special hand controls and other special equipmentinstalled in a car for the use of a person with a disability may be deducted.Also the cost amount of a vehicle specially designed to hold a wheelchairthat is in excess of a regular vehicle without the special amenities canprovide a deduction. However, the cost of operating a specially equippedcar cannot be deducted.
Contact lenses and eyeglasses
Laser eye surgery: Amounts paid for surgery, such as radiokeratotomy,are deductible, if done primarily to promote the correct function of theeye and improve vision.
Fertility enhancement: Deductible medical expenses include thecost of procedures to overcome the inability to have children, includingin vitro fertilization and temporary storage of eggs or sperm. Also, surgicalprocedures to reverse prior surgery that prevents you from having childrenis a deductible expense.
Learning disabilities: Tuition fees paid to a special school fora child who has a severe learning disability caused by medical or physicalimpairments can be deducted, if the child's attendance at the school isrecommended by your doctor. Tutoring fees paid to individuals speciallytrained and qualified to work with children with severe learning disabilitiescan be a deduction if the tutor is engaged on your doctor's recommendation.
Lifetime care: advance payments. You can include in medical expensesa portion of a life-care fee paid either monthly or as a lump sum underan agreement with a retirement home. The amount of payment to include isthe portion that would be allocable to the medical care. The agreement muststipulate that you pay a specific fee as a condition for the home's promiseto provide lifetime care that includes medical care.
Medical conferences: Amounts paid for admission and transportationto a medical conference when the conference concerns a chronic illness ofyou, your spouse or your dependent can be deducted. The cost of the medicalconference must be primarily for and necessary to medical care. You mustspend the majority of your time at the conference attending sessions onmedical information. Cost of meals and lodging are not deductible as a medicalexpense.
Transportation: Amounts paid for transport primarily for and essentialto medical care can be deducted as a medical expense. For example, bus,taxi, train, plane fares or ambulance service would all be allowed if theyfulfilled the "primary for" and "essential to" requirements.The transportation expenses of a parent who must chaperone a child who needsmedical care would also be allowed. Transportation expenses of a nurse orother aid who can give injections, medications or other treatment requiredby a patient, traveling with the patient could be deducted.
For car expenses, you can include out-of-pocket expenses for the carsuch as gas and oil, but not depreciation, insurance, general repair ormaintenance expenses. Alternatively, use a standard rate of 12 cents permile (year 2001 rate) for use of the car for medical reasons. Also trackparking fees and tolls, as these can be used under either method.
Weight loss programs: In the case of an existing disease (suchas heart disease) a physician may direct you to engage in a weight lossprogram. In such circumstances, the expense of such a program becomes adeductible medical expense. Cost of weight loss programs for the purposeof weight control and maintaining general good health is not allowed.
Medical information plan: Amounts paid to a plan that keeps medicalinformation so that it can be retrieved from a computer databank for medicalcare is a deductible expense.
Sterilization: Medical expenses include the cost of legally performedoperations to make a person unable to have children.
Legal fees: Legal fees necessary to authorize treatment for mentalillness can be deductible. Legal fees for management of a guardianship estate,for conducting affairs of a mentally ill person, or for other fees thatare not necessary for medical care are not deductible.
Tuition: Any charges for medical care that are included in thetuition of a college or private school are deductible as long as the chargesare stated separately in a tuition bill.
Transplants: A transplant recipient can deduct payments made forsurgical, laboratory and transportation expenses for a donor or a possibledonor of an organ. A donor or a possible donor may deduct such expensesif he or she pays them.
Stop smoking programs: The amount paid for a program to stop smokingis a deductible expense. Amounts paid for drugs that do not require a prescriptionsuch as nicotine gum or patches, are not deductible.
There are other potentially deductible expenses described in Publication502. If you believe you will be over the 7.5 percent of AGI limitation,obtain a copy and review it to capture all possible expenses.
Track when expenses are actually paid, as this will have a bearing forthe year of deductibility. For large investments, such as extensive renovationsof a home related to special features required by a medical condition, talkwith your CPA. Since home construction can span a few years, some carefulplanning may be necessary to ascertain when and how to claim deductionsrelated to improvement expenses in excess of fair market worth.